RPP Supports Tax Reform in New Jersey to Achieve Smart Growth Goals
Since its founding in 1968, RPP has advocated reforming New Jersey's current tax structure because of its impact on land use and the overall quality of life in this region. Our work indicates that Smart Growth will be substantially impeded without tax reform.
Over-dependence on local property taxes has made communities shun residential development in general and affordable housing in particular. It also encourages the " ratables chase" for clean commercial development. This causes sprawl to spread further into rural areas, causing the loss of farmland and open space, a labor shortage, increased housing costs, increased commute times and traffic congestion. It also draws the economic base away from the cities, increasing the concentration of poverty, nonperforming schools and other indicators of urban distress. This distress can be seen to be creeping into the inner ring suburbs, as the economy slips further and further into rural areas, and reducing the ability of existing communities to support services for their population.
But reducing the over-dependence on local property tax as the only objective, without the context of the land use and quality of life goals we support, will not get the results we need. We must continue to advocate reform in which:
- Schools everywhere improve, because cities would have more funding and suburbs could reduce costs by phasing growth to a more manageable rate.
- When city schools improve and city tax rates come down, cities are more attractive to development, thereby enhancing revitalization investment and reducing growth pressure in the suburbs.
- Housing costs go down, as suburbs look more favorably on housing development of various kinds, supporting an adequate workforce, increasing our competitiveness, etc.
- The costs of infrastructure throughout the region come down by reducing the need to duplicate facilities in the suburbs when capacity is available in the cities.
- With less competition for ratables, suburban communities cooperate more readily to achieve common goals, such as corridor planning, natural resource protection, infrastructure construction, and other regional smart growth goals.
RPP took the opportunity of presenting our position to the last commission that was established to look at reforming taxes in New Jersey, Governor Christine Todd Whitman's Commission on Tax Reform. The following was our presentation.
"I am appearing tonight on behalf of the members and Board of Directors of the Middlesex Somerset Mercer Regional Council, a private non-profit dedicated to sound land use planning and regional cooperation.
MSM applauds Governor Whitman's formation of the Property Tax Reform Commission and we wish you well in your efforts to achieve your ambitious agenda. It is our view that the property tax is one of the primary obstacles to the goals of the State Development and Redevelopment Plan, especially to achieving the goals of preserving open space, providing affordable housing, and revitalizing our cities. We feel that no policy issue is more important to address right now, and we are here to offer our help in your work.
That New Jersey is overreliant on the property tax seems indisputable. In an average state, 33 percent of tax revenues come from the property tax. In New Jersey, that figure is 45 percent. Tax bases vary widely from one municipality to another. The result has been a regressive tax structure that serves no community well.
In urban areas, the tax rate has risen as quickly as the tax base has shrunk, creating a heavy tax burden that in many cases impacts New Jersey's poorest residents and works against even the best revitalization efforts. Despite the higher tax rates, the reduced tax rate base has led to the underfunding of New Jersey's urban school districts, a situation the State has been struggling to address for many years.
In fact, a direct link can be seen between reliance on the property tax and the problem of school funding. On average, states contribute half the funds spent on education. Were the State of New Jersey supporting education at that average level, the State would be providing $6 billion of the $12 billion currently spent. However, the State only spends $4.5 billion, considerably less than the average state.
As studies have shown (Inman, 1992; and Haughwout, 1997), rising property tax rates have exacerbated the flight of ratables to the suburbs. In his 1997 book, Metropolitics, Myron Orfield demonstrated that a significant portion of the funds spent on infrastructure improvements in the suburbs, came from taxes paid in cities. His figures show the insult added to the injury that the once healthy urban cores actually helped to finance the ratable flight to the suburbs.
However, despite the flight of the tax base from the cities to the suburbs, overreliance on the property tax has created problems for suburban New Jersey as well. Because municipalities are so dependent on the property tax to fund schools and other "big ticket" services and facilities, many have the false belief that they can achieve tax relief for residents through increasing commercial development. This has resulted in what is commonly called the "ratables chase" in the suburbs, pressuring municipalities to zone open land for office or retail development. The facts demonstrate, however, that additional development creates its own pressure for more housing, causing municipalities to seek even more development in a never-ending cycle. The ratables chase eats up our farmland and open spaces, leading to suburban sprawl without reducing high property taxes.
The over-reliance on property taxes also causes municipalities to resist affordable housing, or almost any housing for families with children. A study in Cranbury Township in Middlesex County demonstrated that only a home valued at more than $700,000 would bring in enough tax revenues to cover the costs of educating the children that would live there. This has caused planning boards to succumb to the current market for age-restricted developments, rezoning sizable parts of the township to exclude children in their communities. The quest for high-end housing also contributes to suburban sprawl, because of the expectation of sizable lots to go with the sizable homes.
To avoid a continued reliance on a property tax structure that has negative ramifications for all New Jerseyans, MSM recommends that the Commission explore alternative structures, and that each potential alternative be reviewed with three criteria in mind:
- will the proposed remedy reduce overdependence on locally-generated revenues;
- will the proposed remedy reduce development pressures on open land and encourage affordable family housing;
- will the proposed remedy level the playing field among all municipalities and school districts?
In addition, rather than simply focusing on tax-based remedies, MSM believes that a three-pronged strategy outlined below will work best: it will not only address the current inequities in the system, but reduce the pressures that result in New Jersey's dependence on the property taxes. This three-pronged approach includes:
Support the State Development and Redevelopment Plan:
Differential taxation: By instituting lower property taxes in SDRP Centers and Planning Areas 1 and 2, and higher property taxes in Planning Areas 3, 4, and 5 (excluding centers), development could be encouraged into those regions where the infrastructure exists to support it. (NOTE: as with the other recommendations, this alone will not solve all of the problems that we feel that reform should address -- other recommendations must be implemented to complement this.)
Reduce pressure to develop farmland: Farmland preservation is currently encouraged through a lower level of taxation on farmland. This could be strengthened by exchanging this preferential tax treatment for the State receiving a portion of the proceeds from the sale of the property for alternative usage. As such, the incentives to develop farmland would be less attractive.
Tax incremental financing (TIF): TIF offers benefits that would reduce the property tax burden, but it is not currently used in New Jersey. It will help to encourage investment in redeveloping areas.
State Plan Implementation Fund: A statewide fund for financing infrastructure needed in appropriate growth areas is needed. Pooling, through some type of taxbase sharing arrangement, of the growth in property value resulting from development not in accord with the State Plan would reduce the incentive for individual municipalities to chase ratables.
Motor Fuels Tax: Currently among the lowest in the nation, New Jersey's fuel tax could be increased to provide additional revenue and be a disincentive for development in auto-dependent areas.
Proper Allocation of Functional Responsibilities:
Reallocation of public service costs: If those public service costs currently assumed by municipal and county governments that are more appropriately State responsibilities were assumed by the State, pressures on local property taxes would be reduced.
Regionalization: Although regionalization cannot be considered a panacea for reducing taxes, it can reduce duplication, avoid future costs, and reduce the need to attract additional ratables.
Seek Appropriate Levels of Taxation:
Income Tax: The income tax is the most progressive tax option, and would affect urban and suburban New Jerseyans equally.
Statewide property tax: With a statewide property tax rate (as has been ordered by a recent New Hampshire Supreme Court to fund schools), developers would no longer seek to avoid high-tax urban areas and suburban municipalities would no longer need to chase ratables.
The above list is not intended to be exhaustive, but is intended to show a package of remedies that are needed to address the problem effectively. Property tax reform is a complex issue, and MSM appreciates the opportunity to provide its perspective to the Commission. Although we are planners and not experts in tax policy, we know that a balanced tax structure is not only possible, but essential if New Jersey's open space is to be preserved, if housing is to be made affordable, and if our cities are to be revitalized. We would be pleased to work with the Commission to achieve that balanced tax structure. If we can provide additional assistance, please feel free to contact MSM.
Thank you for your consideration.